Interest Margin, Market Power, Diversification Strategy and Banking Stability: Evidence from ASEAN

33 Pages Posted: 11 Feb 2016

See all articles by Yosman Bustaman

Yosman Bustaman

Swiss German University

Irwan Adi Ekaputra

Universitas Indonesia

Zaäfri A. Husodo

Universitas Indonesia, Graduate School of Management

Ruslan Prijadi

Universitas Indonesia, Graduate School of Management

Date Written: February 10, 2016

Abstract

Interest margin, as the main sources of revenue plays an important role in maintaining banking stability. Additionally, increasing market power and shifting the business to non-traditional products has been seen as promoting banking stability. Theoretically, Martinez-Miera & Repullo (2008,2010) suggest non-monotonic correlation between competitions and risk taking in the loan market. However, studies on relationship between diversification and banking stability reveal mixed results. This study aims to examine the impact of interest margin, market power and banking diversification strategy on stability in ASEAN-4 (Indonesia, Malaysia, Thailand and the Philippine) banking system. We estimate the long-term equilibrium with random effect panel data regression model. Furthermore, to obtain the short-term dynamics relationship between the variables in the model and to solve endogeneity problems, we estimate the model of dynamic panel data using System of Generalized Method of Moment (GMM). After controlling for foreign bank penetration, bank specific variables and macro-economic variables, we find intermediary activities that generate interest margin are remaining as dominance factor to promote banking stability in the region. In addition, non-traditional products may help bank to reduce risk and promotes stability. Additionally, focused-banks which are channelling special types of loan might charge higher margin and lowering bank probability of default. Furthermore, an increase in market power as a consequence of banking consolidation will increase banking stability, and it is consistent with “competition fragility” hypothesis. However, this study could not support the non-linear relationship between competition and banking stability. This study also finds that foreign bank penetrations is positively and significantly affect banking stability. However, larger banks tend to take excessive risk therefore reduce stability.

Keywords: ASEAN, Banking, Diversification, Foreign Bank Penetration, Interest Margin, Market Power, Stability

JEL Classification: G21

Suggested Citation

Bustaman, Yosman and Ekaputra, Irwan Adi and Husodo, Zaäfri A. and Prijadi, Ruslan, Interest Margin, Market Power, Diversification Strategy and Banking Stability: Evidence from ASEAN (February 10, 2016). Asian Finance Association (AsianFA) 2016 Conference, Available at SSRN: https://ssrn.com/abstract=2730660

Yosman Bustaman (Contact Author)

Swiss German University ( email )

The Prominence Tower
Jalan Jalur Sutra Barat Alam Sutera
Tangerang, Banten 12270
Indonesia

Irwan Adi Ekaputra

Universitas Indonesia ( email )

UI Campus
Depok, West Java 16424
Indonesia

Zaäfri A. Husodo

Universitas Indonesia, Graduate School of Management ( email )

Depok, West Java 16424
Indonesia

Ruslan Prijadi

Universitas Indonesia, Graduate School of Management ( email )

Depok, West Java 16424
Indonesia

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